[MCC5412] FOOD SUPPLY CHAIN MANAGEMENT

LECTURE 4: FOOD SOURCING & PROCUREMENT II

LECTURE LEARNING OUTCOMES

 Upon completing this lecture, you should be able to:

 distinguish & criticize different types of procurement organizational structures found in this day & age
 discuss the purposes of centralized & decentralized purchasing functions
 identify & depict the procurement process
 explain various kinds of purchasing methods available in the market
 evaluate the impact of insourcing & outsourcing on purchasing process
 discern the requirements for writing purchasing specifications
 delineate the ways how to develop & foster relationships between buyer & supplier

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STRUCTURE & METHODS OF PROCUREMENT

 Structure of procurement
 Organizational structure is the formal arrangement of jobs within an organization (Robbins & Coulter, 2021)
 Purposes of organizational design
 Divides work to be done into specific jobs & departments
 Assigns tasks & responsibilities associated with individual jobs
 Coordinates diverse organizational tasks
 Clusters jobs into units
 Establishes relationships
 Establishes formal lines of authority
 Allocates & deploys organizational resources

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STRUCTURE & METHODS OF PROCUREMENT

 Structure of procurement
 Elements of organizational design
 Work specification
 Departmentalization
 Chain of command
 Span of control
 Centralization & decentralization
 Formalization

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STRUCTURE & METHODS OF PROCUREMENT

 Structure of procurement
 Organic
 Cross-functional teams
 Cross-hierarchical teams
 Free flow of information
 Wide spans of control
 Decentralization
 Low formalization

A typical purchasing organizational pattern for a medium-sized

independent hospitality operation

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STRUCTURE & METHODS OF PROCUREMENT

 Structure of procurement
 Mechanistic
 High specialization
 Rigid departmentalization
 Clear chain of command
 Narrow spans of control
 Centralization
 High formalization

A typical purchasing organizational pattern for a large independent

hospitality operation

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STRUCTURE & METHODS OF PROCUREMENT

 Factors affecting purchasing’s position in an organization

 Historically purchasing’s value has been underestimated
 Industries that are not driven by materials undervalue purchasing’s contribution
 Purchased item values – Where purchased goods contribute a high percentage to the cost of products, purchasing is highly
regarded
 Other factors contributing to purchasing’s position
 Philosophy of founder
 Type of materials purchased
 Roles purchasing play in affecting company’s competitive edge

 To whom does purchasing report?

 Three possible placements of purchasing in the organization hierarchy
 Research results suggest that the higher the level of purchasing within a firm, the more likely to have purchasing objectives achieved 7
STRUCTURE & METHODS OF PROCUREMENT

 Organizing the purchasing function

 Four major areas of specialization within the purchasing department
 Sourcing and negotiating – identifies potential suppliers
 Purchasing research
 Long-range material forecasts
 Boundary scanning

 Operational support & order follow-up

 Expediting orders
 Releasing orders

 Administration & support

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STRUCTURE & METHODS OF PROCUREMENT

 Responsibilities and tasks commonly performed by the purchasing function

 Buying
 Expediting & inventory control
 Transportation
 Managing countertrade agreements
 Insourcing/ Outsourcing
 Value analysis
 Purchasing research/material forecasting
 Strategic supply management
 Other responsibilities
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STRUCTURE & METHODS OF PROCUREMENT

 Placement of authority
 Organizations must decide who will make what decisions
 Decision making authority exists on a continuum ranging from complete authority at the corporate level to total authority
in the hands of the operating units
 Decision making authority exists on a continuum

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STRUCTURE & METHODS OF PROCUREMENT
ADVANTAGES of CENTRALIZATION
 Leverage volume
 Reduce duplicated efforts
 Coordinate plans/ goals
 Better manage company-wide systems
 Develop expertise
 Manage company-wide change
ADVANTAGES of DECENTRALIZATION
 Speed & responsiveness
 Understanding unique operational requirements
 Product development support
 Ownership
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STRUCTURE & METHODS OF PROCUREMENT

 Organizing for supply chain management

 An integrated organizational structure is emerging to coordinate flow of activities in the supply chain
 The goal is to minimize conflict in achieving organizational objectives
 Tasks: evaluate & select suppliers develop global commodity strategy, carry out supplier development, etc.
 Work team planning guide
 Identify appropriate team assignments
 Form work team & select qualified members & leader
 Determine member training requirements
 Identify resource requirements
 Determine team authority levels
 Establish team performance goals
 Determine how to measure & reward participation & performance
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 Determine team charters
STRUCTURE & METHODS OF PROCUREMENT

 Future procurement organization

 Flattened hierarchy for faster decision making & free flow of ideas
 Uses cross-functional teams
 Greater decentralization of buying activities along with centrally led coordination in strategic, long-term, or company-wide
issues
 Uses the Internet, Intranets and IT
 Rotates managers to equip them with broad knowledge & expertise
 Co-location of purchasing personnel with internal customers

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STRUCTURE & METHODS OF PROCUREMENT

 Methods of procurement
 Procurement process
 The normal sequence of activities involved in most acquisition activities begins when a need is perceived for some articles or service &
ends when the need has been met & payment made

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A procurement process (Baily et al., 2005)

STRUCTURE & METHODS OF PROCUREMENT

 Methods of procurement
 Variables that affect the buying process

Product
Complexity
Low High
Commercial
Uncertainty

Low
Purchasing Department
Engineering Dominant
Dominant

Finance and Administration Cross-functional Decision

Dominant Making
High

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Typology of buying situations (Fisher, 1970)
STRUCTURE & METHODS OF PROCUREMENT

 Methods of procurement
 Purchase situations
 They are categorized according to the prior experience of the buyer with the product & supplier; buy classes can be classified as straight
rebuys, modified rebuys and new tasks

Straight Rebuy Modified Rebuy New Task

Gas, Water, Cleaning Bulk Office Courier Business

Computers Buildings
Electricity Materials Chemicals Furniture Services Cars

Routine Task New Task

Low Risk High Risk

Office Electronic Computer Telephone Production

Spare Parts 16
Supplies Components Terminals System Equipment
STRUCTURE & METHODS OF PROCUREMENT

 Methods of procurement
 Purchase methods
 Supply base optimization: determining the appropriate number & mix of suppliers to maintain
 Total quality management of suppliers: working with suppliers to initiate quality processes & procedures to attain zero defect
quality while endorsing continuous improvement
 Global sourcing: requires purchasing to view the world as a potential source for products
 Longer-term supplier relationships: the selection of & continuous involvement with suppliers
 Early supplier design involvement: participation of suppliers at the concept or predesign phase of new-product development
 Supplier development: working directly with a supplier to facilitate improvement in a designated functional or activity area
 Total cost of ownership: identifying cost considerations beyond unit price, transport & tooling
 e-reverse auctions: using the Internet to facilitate a group of pre-qualified suppliers competing against each other to win business

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STRUCTURE & METHODS OF PROCUREMENT

 Critical role of insourcing/outsourcing strategy

 Insourcing/outsourcing decision: whether to produce internally, or procure externally
 Decision now being applied to every process & process within the organization
 The primary driver has been cost reduction
 The insourcing/outsourcing decision process
 Company Strategy Formulation
 This step requires:
 An assessment of how sourcing decision aligns with organization’s strategic long-term plans
 A determination of an organization’s core competency
 An assess of the maturity of the process technology used to make an item or accomplish a process

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STRUCTURE & METHODS OF PROCUREMENT

 The insourcing/outsourcing decision process (cont’d)

 Conduct total cost analysis of all alternatives
 Besides the obvious costs, costs such as idle equipment, loss of jobs, potential union grievances, & other factors must be considered
 The following exhibit summarizes the key factors to consider in this analysis

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STRUCTURE & METHODS OF PROCUREMENT

Insourcing Factors Outsourcing Factors

 Direct labor  Purchase costs
 Direct material  Inbound freight/delivery
 Inbound freight  Space
 Facilities  Administrative costs of control, contact with supplier
 Depreciation  Continuing investment
 Overhead  Costs of inventories
 Direct management costs  Working capital costs
 Cost of inventories
 Working capital costs
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STRUCTURE & METHODS OF PROCUREMENT

 The insourcing/outsourcing decision process (cont’d)

 Conduct total cost analysis of all alternatives (cont’d)
 Types of insourcing/outsourcing costs:
 Total variable costs
 Total factory costs
 Full operating costs
 Determination of transfer price

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STRUCTURE & METHODS OF PROCUREMENT

Advantages of Insourcing Advantages of Outsourcing

 Higher degree of control  Greater flexibility
 Visibility over process  Lower investment risk
 Economies of scale  Improved cash flow
 Lower potential labor costs

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STRUCTURE & METHODS OF PROCUREMENT

 The insourcing/outsourcing decision process (cont’d)

 Implementation
 Successful implementation is driven by three critical activities:
 Effective supplier selection
 Information sharing
 Buying company resource allocation

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PURCHASE SPECIFICATION

 A product specification, sometimes referred to as ‘product identification’, is a description of all the characteristics
in a product required to fill a certain production &/or service need (Feinstein & Stefanelli, 2017)
 Purposes of a purchase specification
 It serves as quality control standards & as cost control standards
 It helps to avoid misunderstanding between suppliers, buyers, users, & company officials
 In a buyer’s absence, they allow someone else to fill in temporarily
 It serves as useful training devices for assistant buyers & manager trainees
 It is essential when a company wants to set down all relevant aspects of something it wants to purchase, to submit a list of
these aspects to two or more suppliers, & to ask these suppliers to indicate (bid) the price they will charge for the specific
product or service

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PURCHASE SPECIFICATION

 Who decides what to include on the purchase specification?

 Users
 Influencers
 Buyers
 Decision-makers
 Gatekeepers

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PURCHASE SPECIFICATION

 Methods of description
 By brand
 ‘Or equal’
 By specification
 Physical or chemical characteristics
 Material & method of manufacture
 Performance
 By engineering methods
 By miscellaneous methods
 Market grades
 Sample
 By a combination of two or more methods 26
PURCHASE SPECIFICATION

 Methods of description
 Advantages of buying with specifications include
 Evidence exists that thought & careful study have been given to the need & the ways in which it may be satisfied
 A standard is established for measuring & checking materials as supplied, preventing delay & waste that would occur with improper
materials
 An opportunity exists to purchase identical requirements from a number of different sources of supply
 The potential exists for equitable competition
 The seller will be responsible for performance when the buyer specifies performance

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PURCHASE SPECIFICATION

 Methods of description
 Limitations of using specifications
 There are requirements for which it is practically impossible to draw adequate specifications
 The use of specifications adds to the immediate cost
 The specification may not be better than a standard product, readily available
 The cost is increased by testing to ensure that the specifications have been met
 Unduly elaborate specifications sometimes result in disqualifying or discouraging potential suppliers from placing bids in response to
inquiries
 Unless the specifications are of the performance type, the risk & responsibility for the adaptability of the item to the use intended rests
wholly with the buying organization
 The minimum specifications set up by the buying organization are likely to be the maximum furnished by the supplier

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PURCHASE SPECIFICATION

 Methods of description
 What influences the types of information included on the specification?
 Company goals & policies
 The time & money available
 The production, systems the hospitality operation uses
 Storage facilities
 Employee skill levels
 Menu requirements
 Sales prices or budgetary limitations
 Service style
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PURCHASE SPECIFICATION

 Methods of description
 Standardization & simplification
 Standardization definition
 It means agreement on definite sizes, design, quality, & the like
 It is essentially a technical & engineering concept

 Simplification definition
 It refers to reduction in the number of sizes, designs, & so forth
 It may be applied to articles already standardized as to design or size or as a step preliminary to standardization

 By stressing the standardization & simplification of the component parts, rather than the completed end product, production economies
may be gained combined with individuality of end product
 Procurement advantages are gained in terms of low initial cost, lower inventories, & diversity in selection of sources
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MAINTAINING BUYER – VENDOR RELATIONSHIP

 Supplier relations
 A sourcing structure is not only characterized by the number of suppliers, it is also characterized by the relationship of co-
operation between the company & its suppliers, especially with respect to the choice of an appropriate level of relations for
different types of suppliers

Supplier: Sales/Marketing Customer: Purchasing

· Goals · Goals
· Resources · Resources
· Constrains Marketing/ · Constrains
Sales Purchasing
· Problem- Sales Transaction Buyer · Problem-
Manager Department
solving Department solving
activities activities
· People · People

Purchasing management requires management of supplier relationships within organizational

networks 31
MAINTAINING BUYER – VENDOR RELATIONSHIP

 Dependency & bonds

 Eight types of bonds in a buyer-supplier relationship

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MAINTAINING BUYER – VENDOR RELATIONSHIP

 Development of supplier relationships

 Levels of relationships

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Three levels of buyer-supplier relationship (Jonsson, 2008)

MAINTAINING BUYER – VENDOR RELATIONSHIP

 Development of supplier relationships

 Conventional supplier
 This relationship is characterized by deliveries to single orders, prices being decisive for the supplier chosen, the company having its own
quality control & the company guarding against disruptions in deliveries by keeping its own safety stocks

 Associated supplier
 Relationships with them are long term & reviewed periodically
 The supplier guarantees the quality of products delivered, which means that the company does not need to carry out quality controls on
deliveries

 Partnership supplier
 Relationships with them are largely similar to those with associated suppliers, but also include joint product development & frequent
exchange of information on production processes, products & quality issues
 They often involve joint investments in new technology
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MAINTAINING BUYER – VENDOR RELATIONSHIP

 Supplier segmentation & selection of relationship level

 Segmentation based on significance & availability

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Kraljic’s matrix for structing procurement items & adapting supplier relationships (Kraljic, 1983)
MAINTAINING BUYER – VENDOR RELATIONSHIP

 Supplier segmentation & selection of relationship level

 Segmentation based on frequency & specificity

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Structuring of procurement items on the basis of procurement frequency & degree of order specificity (Jonsson, 2008)
REFERENCE

 Bourlakis, M. A. & Weightman, P. W. H. (2004). Food Supply Chain Management. Blackwell Publishing: UK
 Chopra, S. (2019). Supply Chain Management: Strategy, Planning, & Operation (7th ed.). Pearson: UK
 Eastham, J. F., Sharples, L., & Ball, S. D. (2001). Food Supply Chain Management: Issues for the Hospitality & Retail
Sectors. Butterworth Heinemann: UK
 Feinstein, A. H. & Stefanelli, J. M. (2012). Purchasing: Selection & Procurement for Hospitality Industry (8th ed.). Wiley:
New Jersey.
 Johnson, F. P. (2020). Purchasing & Supply Management (6th ed.). McGraw-Hill: New York
 Jonsson, P. (2008). Logistics & Supply Chain Management. McGraw-Hill: UK
 Spears, M. C. (1999). Foodservice Procurement: Purchasing for Profit. Prentice Hall: New Jersey
 Van Weele, A. J. (2018). Purchasing & Supply Chain Managemetn (7th ed.). Cengage: UK

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END OF LECTURE 4

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